Standard & Poor’s Ratings Services (S & P) has predicted a positive outlook for the non-interest debt market in 2014.
The global rating agency in its review of the Sukuk market stated that the long-term prospects for the industry remain promising as regulators continue to build and strengthen their frameworks to minimize barriers in the market and deepen liquidity.
The report noted the fledging Sukuk market in Nigeria with the debut issuance of Sukuk by Osun State in 2013.
According to the report, the small-$62 million, Nigerian sharia-compliant bond issued by Osun State in October 2013 may signal the start of a fresh source of Sukuk. Senegal’s plan to issue a $200 million sukuk in the first quarter of 2014 to fund infrastructure projects is drawing on support from the Islamic Development Bank.
“We believe that the use of Islamic finance could help Africa pay for multibillion dollars’ worth of infrastructure projects a year and help fund countries’ fiscal deficits. African nations are also looking to diversify their funding sources and gain access to a pool of wealthy investors from the Middle East—investors who can only invest in sharia-compliant products. In 2012, for instance, Sudan sold $160 million worth of sukuk while Gambia has been issuing short-term sukuk over the past few years,” the report noted.
S & P stated that while Malaysia is already benefitting from a broad sukuk investor base and liquid debt market, the increased interest from issuers, notably in the Middle East and Asia, in tapping the Malaysian ringgit and US dollar market should spur growth over the next few years as Malaysia cements its leading position in the industry.
After a slowdown in 2013 when sukuk volumes declining by 13 per cent, S & P anticipated that the sukuk industry will expand again in 2014, partly driven by corporate and infrastructure issuers in the Gulf.
“What’s more, total issuance will exceed $100 billion for the third year in a row if yields remain attractive for issuers. And, after weakening in 2013, we believe issuance could pick up again in Malaysia in 2014 as its investment program resumes,” S & P stated.
The report noted that there could be double-digit growth in issuance by Gulf corporate and infrastructure entities, due in part to large infrastructure financing needs pointing out that increasing private issuance could signal a change in the sukuk market characteristics.
According to the report, Sovereign sukuk could be slowly emerging as an alternative to fund growth in African countries.
It however noted that there is need for a regulatory push to strengthen frameworks, lower barriers to entry, and deepen liquidity in the sukuk markets.
“At the same time, we believe that global growth in sukuk issuance could be further supported through: stabilizing or improving investment projections in key markets such as Malaysia, meeting the high demand for infrastructure spending across the GCC, where we expect issuance to continue climbing at a double-digit pace in the next two years, supportive regulations in the UAE, and the use of sukuk for repurchase transactions with the Central Bank of West African States (BCEAO) and sovereign issuance, which could assist the development of sukuk markets in African countries looking to fund growth and diversify fiscal funding,” S & P stated.
It added that refinancing activities could boost the sukuk market as a result of the stock of both Islamic and conventional financings maturing in 2014, estimating that about $50 billion of sukuk will mature in 2014.
“Our economists are projecting relatively strong economic growth in key sukuk issuing countries including Malaysia, Saudi Arabia, and the UAE in 2014. That said, we expect Malaysia’s public investment program to continue to drive sukuk issuance throughout the year,” S & P noted.
According to the report, sovereign and sovereign-related issuance, including corporate and infrastructure GREs, will continue to dominate the sukuk market in 2014, as it has in past years.
